The European Central Bank has announced a sharp hike in interest rates in the euro zone to fight inflation.
Prices on the block are rising at the fastest rate in half a century as energy costs skyrocket.
The ECB raised all of its key interest rates by three-quarters of a percentage point and warned it was likely to raise rates again later this year.
The bank raised interest rates in July, the first hike in more than 11 years.
“Price pressures have continued to intensify and widen across the economy,” the ECB said after its latest decision.
The ECB raised its main deposit rate – how much interest it pays on deposits – from zero to 0.75% and its main refinancing rate – how much banks pay when they borrow money from the ECB – to 1.25%.
Central banks are raising interest rates to raise the cost of borrowing, which should induce people to borrow and spend less and save more. In theory, this will help curb the rise in prices.
Global inflation is being driven by higher energy prices. Prices rose faster as economies recovered from the effects of the coronavirus pandemic, but they continued to rise due to Russia’s war in Ukraine.
ECB President Christine Lagarde said the central bank could not control high energy prices.
“I can’t lower the price of energy,” she said. “I can’t convince the big players in this world to lower gas prices. I can’t reform the electricity market Energy.”
She added that if gas prices continue to “shoot up” it would be “recessionary”.
Should Russia cut gas supplies to the EU completely, then the ECB sees the scenario – if it fails to secure alternative gas supplies from Asia, Norway and the US – as gas rationing throughout the euro area and a recession in 2023, Ms Lagarde said.
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With the ECB’s statement specifically stating that more rate hikes would be needed, markets continue to expect another half-point hike at the bank’s October meeting.
According to Eurostat, inflation in the euro zone is expected to be 9.1% in August, compared to 8.9% in July.
Janet Mui, head of market analysis at asset manager Brewin Dolphin, said the ECB was “playing catch-up” with the US Federal Reserve and Bank of England, which have already hiked rates.
The ECB has forecast eurozone inflation of 8.1% this year, 5.5% in 2023 and 2.3% in 2024, but “these come with a high degree of uncertainty given the volatility of gas prices “.
As high energy prices weaken purchasing power, some economists are forecasting a downturn in the euro zone.
Some politicians have spoken of a recession, and the ECB’s new projections also show significantly lower growth in the coming years.
“After a rebound in the first half of 2022, the latest data point to a significant slowdown in economic growth in the euro area, with the economy expected to stagnate later in the year and in the first quarter of 2023,” the ECB said.
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